…Understanding the Balance Sheet

…Understanding the Balance Sheet

…Liabilities are also divided in to two parts. Current and long term; current liabilities are the obligations that mature within a year, and long term ones mature after one year.

Owner’s equity can be created from two sources: owner’s investment and the retained earnings that is affected by a profit or a loss that company makes as a result of business operations.

Transactions that affect the balance sheet can be summarized as follows: if a company purchases a new truck by making a cash down payment and the rest is financed, than current assets decrease by the down payment amount, long term assets increase by the total purchase price of the truck and the long term liabilities increase by the amount financed. The key to understanding the balance sheet equation is that, assets and liabilities and owner’s equity totals increase equally.

This is just a short summary of a basic idea behind the balance sheet. Debates continue on the basic concepts of financial reporting; on how to make accounting reporting more ethical and reduce possibility of an accounting fraud.

We hope that you learned more about the balance sheet and now are able to understand one when you will look at it. Learning these principles will be beneficial to anyone who is a small business owner or plans to own one in the future.